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April 18, 2018 0

Cash flow problems

If your business is struggling then you’ll no doubt want to do everything in your power to save it.

One of the most common reasons that a business gets into trouble, and ultimately fails, is due to cash flow problems. Research from Barclaycard has revealed that “cash flow concerns keep 63% of small business bosses awake at night.” Late payments from customers is cited as one of the main reasons for cash flow problems within a business, with 32% of SMEs claiming it has caused them problems.

Even when the company is seemingly doing well and is successful, SMEs often have periods when they struggle to meet their monthly overheads due to late payments from customers. Without the cash to make their vital payments, and often no big cash reserve to dip into, these companies may not survive.

If the company is struggling then it is unlikely that the bank will provide new funds or extend an overdraft facility. Which is why business owners may consider using their own money to inject a temporary cash infusion to patch up their cash flow problems. But, is that a good idea?

Is it wise to use personal money to help improve the cash flow of your company?

It may be tempting to put your own money into your company when it is struggling. However, there are drawbacks to this option.

You may not have enough money to stop the problems

There is a high chance that the money you put into your struggling business will be swallowed up and you will never see it again. It may not be a big enough cash injection to save your company. Temporary cash infusions often don’t help when there are bigger problems within the company.

You could become personally liable for losses

If your business is registered as a limited company then, as the director, you are personally protected should your business fail. That’s because your company is legally a separate entity.

However, if you get a personal loan from a lender, you will still be liable to pay that loan back – whatever happens to your company.

You may risk personal debt and bankruptcy

When funds you injected into your company came from a personal loan or personal credit card, and your company ultimately fails, you will still be liable to repay these funds.

If you do not have sufficient money to repay these, you risk being forced into a personal debt arrangement (e.g. an Individual Voluntary Arrangement) or bankruptcy.

What are the other options?

If your liabilities are bigger than your assets and you’re struggling to pay your bills and/or debts, then your business could technically be insolvent.

Rather than risking more funds within the business, it may be best to enter into a Creditors’ Voluntary Liquidation (CVL). This is where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. A CVL acknowledges your duties as a director to your creditors and is the best course of action to take if you feel there is no way that the company can get out of its debt, and you care about your future business reputation.

Before you take any drastic steps, like putting some of your own money into your company, talk to us at Clarke Bell 0161 907 4044 / [email protected]

We can give you free advice and will be able to advise you whether a Creditors’ Voluntary Liquidation (CVL) is the best course of action for you and your company to take.

(When a CVL is not the best option, we will tell you what is.)

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